Intel For Broadcom? Street Blanches at Potential $170B Deal

Amit Daryanani with RBC Capital Markets offers his model of potential synergies in an Intel hypothetical purchase of Broadcom.

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Shares of Intel (INTC) are down 83 cents, or 1.6%, at $51.36, following that report from The Wall Street Journal late Friday that Intel is closely watching Broadcom’s (AVGO) hostile bid for Qualcomm (QCOM), and hoping Broadcom fails, so Intel can buy Broadcom.

The Street today is expressing a mix of skepticism and enthusiasm — skepticism given the size of any potential deal, and some enthusiasm for what some think would be strategic advantages.

Broadcom shares are up $9.15, or 3.6%, at $262.99, while Qualcomm shares are up 7 cents at $63.10.

Reuters’s Arunima Banerjee, Stephen Nellis, Peter Henderson, and Diane Bartzover the weekend wrote that Intel responded to them by refusing to comment on the speculation but also emphasizing Intel’s work integrating existing deals, like Mobileye:

Intel said it does not comment on “rumors or speculation” related to mergers and acquisitions but that it is focused on its previous acquisitions. “We have made important acquisitions over the past 30 months - including Mobileye and Altera - and our focus is on integrating those acquisitions and making them successful for our customers and shareholders,” Intel said in a statement to Reuters.

Note that CNBC’s David Faber relates that he’s heard Intel had hired bankers to mull a potential deal, but that “it seems unlikely right now,” meaning a deal, and that Intel doesn’t seem especially interested in getting involved just to thwart Broadcom’s attempt at Qualcomm.

Amont those opining today, one of the most enthusiastic is RBC Capital’s Amit Daryanani, who’s got a Sector Perform rating on Intel.

He likes the prospect of product synergies and considers the likely deal debt manageable:

We think AVGO (assuming a reasonable valuation is paid) would be an attractive acquisition for INTC. Our analysis shows the deal would be 85c-90c/20%+ accretive and would provide multiple positives for INTC: 1) A leading position in filtering and connectivity, given AVGO's best-in-class FBAR and wifi/bluetooth combo assets, 2) Ability to build an ecosystem around cloud and enterprise, given AVGO's assets in switching, routing (Tomahawk, Jericho, Trident) and storage, 3) Bigger AI opportunities, as we note AVGO is doing ASICs for machine learning workload, and 4) Material accretion potential over the coming years. In our analysis, we assume INTC funds the deal with debt and equity; this would potentially increase leverage to a manageable ~4x Net-Debt/EBITDA.

Daryanani offers the scenario analysis at the top of this post.

His view seems to be more in the minority at this point. Others are more skeptical given the size of a potential deal.

Caso acknowledges Intel has a dog in the fight, given it splits the baseband modem business in Apple’s (AAPL) iPhone with Qualcomm, and it doesn’t want to see any improvement in Qualcomm’s current legal battle with Apple that would improve Qualcomm’s position.

“It’s been well documented that the performance of Intel’s baseband is inferior to Qualcomm,” he observes, so Intel’s position at Apple is tenuous.

But, the price would be a big challenge for Intel:

But the challenge that Intel would have in acquiring Broadcom would be in the acquisition price, not to mention investors’ confidence in Broadcom management, which would make them reluctant to hand over the keys. AVGO shareholders are generally extremely pretty happy with management, given that the stock has quintupled over the last four years. With the stock now trading at 12x 2019 EPS and representing a 7.7% FY18 free cash flow yield, we wouldn’t expect AVGO shareholders to entertain anything that didn’t represent a very sizeable premium over the current share price. Another way of looking at it – if Qualcomm were to add a potential of $9 / share accretion to AVGO, an acquirer would need to offer a price that adds at least that much value to shareholders, plus a premium. In our view, the resulting price would be so high, it would make an acquisition of Broadcom extremely difficult.

He thinks if the Treasury Departent’s CFIUS panel were to block Broadcom in its Qualcomm bid, as it sounds like they might, that that would likely remove the urgency for Intel to do anything."

Craig Ellis of B. Riley, reflecting on the deal, thinks that “data center “share of rack” strategic logic is interesting” for a Broadcom bid. “But deal size ($244B market cap INTC and $104B market cap AVGO) along with regulatory and integration risks leave us cautious for now on prospects."

Moreover, he sees questionable earnings accretion and questionable “cost synergies” in a deal.

Stacy Rasgon of Bernstein is one of the most skeptical.

His note, titled “It’s a mad, mad, mad, mad world…,” suggests that an Intel purchase of Broadcom would be a huge amount of leverage:

To pull something like this off, INTC will need to pay up; a 25% premium to the recent $280+ high -water mark would be $350+, making this a hypothetical $170B+ EV deal. 2) While technically feasible, leverage would be very high, with ~$100-$160B in net debt at 3-4x EBITDA, and 5-7x debt to FCF given INTC's significantly higher capital intensity.

Rasgon admits he would ordinarily have “simply laughed this off,” though he “adds “we suppose we could develop some sort of strategic rationale.”

He concludes, "this seems like an awfully big risk to take for benefits that appear incremental at best, and (unlike AVGO), Intel's track record with acquisitions is (to put it charitably) spotty."

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